After weeks or months of job seeking, you land your dream job — but it’s in a different state. The location of the job is close enough so that you can commute every day rather than move. However, you are still faced with the dilemma of where and how to pay state income taxes. Understanding where to pay state income taxes when you live in one state but work in another can be confusing. Each state has its own tax laws, residency rules, and agreements that determine how income is taxed. Here’s what you should know if you live in one state but work in another.
Understanding State Residency
State residency is a key factor in determining tax obligations. Most states define residency based on the amount of time spent within their borders. Generally, if you spend a certain number of days within a state, you may be considered a resident for tax purposes. However, residency rules can vary significantly from state to state.
Domicile vs. Statutory Residency
Some states differentiate between domicile and statutory residency. Domicile typically refers to the place you consider your permanent home, while statutory residency is based on the number of days you spend in a state during the tax year, regardless of domicile. Understanding these distinctions is crucial for tax planning. Taxpayers must be aware of their residency status to ensure compliance with state tax laws.
State-specific Rules
Each state has its own rules regarding residency and taxation. For example, some states, like California and New York, have strict guidelines for determining residency, while others, like Florida and Texas, have no state income tax, making residency less of a concern.
Do I Pay State Income Taxes Where I Live Or Work?
The easy rule is that you must pay nonresident income taxes for the state in which you work and resident income taxes for the state in which you live, while filing income tax returns for both states. However, this general rule has several exceptions. One exception occurs when one state does not impose income taxes. Another exception occurs when a reciprocal agreement exists between the two states.
States with No State Income Tax
As of 2025, there are currently nine states in the U.S. that have no state income tax:
- Alaska
- Florida
- Nevada
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
New Hampshire taxes only dividend and interest income.
States With Reciprocal Tax Agreements
What if you live in Milwaukee but you commute every day by Amtrak to Chicago? It just so happens that Wisconsin and Illinois share what is known as a reciprocal tax agreement. Reciprocal agreements allow residents of one state to work in neighboring states without having to file nonresident state tax returns in the state where they work. As a result, your employer would deduct only Wisconsin state taxes from your paycheck, and none for Illinois. Likewise, if you live in Chicago but work in Wisconsin, your employer will only deduct Illinois resident state income taxes from your paycheck. In both instances, you would only be required to file one state income tax return.
States Without Reciprocal Tax Agreements
If you are unlucky enough to work across state lines in a state with no reciprocal agreement with your resident state, (for instance, Illinois and Indiana), then you will need to file income tax returns for both states. However, you should also be able to claim a credit on your resident state income tax return for the state income tax that you paid for the nonresident state. The result is that you actually pay taxes for one state, even though you must deal with the hassle of filing returns in both states.
For example, let’s say you are an Arizona resident and you received rental income from an investment property in Utah. These two states do not have tax reciprocity. So, you report this income to Utah and pay the appropriate tax. When you file your Arizona state tax return, you’ll need to pay taxes on the rental income, but you will receive a credit for the taxes paid to Utah.
It’s important to note that tax reciprocity is not automatic. You must take appropriate action by filing a request with your employer to deduct income taxes based on your state of residence rather than where you work. Unless you make a formal request with your employer, you will continue to be taxed by both states and you will continue to be obliged to file two state income tax returns, potentially resulting in a loss due to double taxation.
Common Scenarios
Let’s take a look at some common examples of how taxes work when you live in one state and work in another.
Commuters: Living in One State, Working in Another
For individuals who live in one state but commute to another for work, tax obligations depend on whether the states have a reciprocity agreement. If no agreement exists, the work state will tax income earned there, and the resident state will tax all income. The resident state typically allows a tax credit for taxes paid to the work state, preventing double taxation.
For example, a New York resident who commutes daily to New Jersey for work will owe New Jersey taxes on income earned there. However, New York will also tax all of their income. To prevent double taxation, New York provides a credit for taxes paid to New Jersey.
Remote Workers: Living in One State, Working for a Company in Another
The rise of remote work has complicated state tax rules. Some states follow the “physical presence rule,” which means you only owe taxes to the state where you physically perform work. However, certain states enforce the Convenience of the Employer Rule, which taxes employees based on their employer’s location unless working remotely is required by the employer.
For example, a Massachusetts resident working remotely for a New York-based company may still owe New York state taxes if their remote work is considered for convenience rather than necessity. However, Massachusetts may also tax their income, requiring them to claim a credit for taxes paid to New York.
Multi-State Workers: Traveling for Work
Individuals who work in multiple states throughout the year may be required to file tax returns in each state where they performed work. Employers may allocate wages based on time spent working in each state. Some states have minimum thresholds, meaning taxes are only owed if earnings in that state exceed a certain amount.
For example, a traveling consultant who spends three months working in California, three months in Texas, and six months in Florida may only owe taxes to California since Texas and Florida do not impose a state income tax. If they are a resident of New York, they will still owe New York taxes on all income but can claim a credit for taxes paid to California.
Moving Mid-Year: Changing Residency
If you move to a different state during the year, you may be required to file part-year resident returns in both states. Each state will tax income earned while you were a resident. If you worked in a third state, you may also need to file a non-resident return for that state.
For instance, if you move from Illinois to Georgia in June, Illinois will tax income earned from January to June, and Georgia will tax income from July to December. If you worked in Indiana before moving, you may also need to file a non-resident return for Indiana.
Filing Multi-State Income Tax Returns
Many people are faced with the dilemma of working in one state and living in another, meaning they need to file a nonresident state tax return. People living and working in two different states often delegate the task of filing state income tax returns to a tax preparation service, an accountant, or a tax attorney. Still, know that many online and home-based tax preparation software programs include state income tax forms with detailed instructions on how to file multi-state tax returns. If your tax situation is otherwise straightforward, you can save yourself a considerable amount of money by using a software program that includes both state and federal income tax forms and filing your own income tax returns.
Frequently Asked Questions
Here are some commonly asked questions about the tax implications of living in one state and working in another.
What is the difference between residency and domicile for tax purposes?
Residency and domicile are both important concepts for determining your tax obligations. Residency refers to where you live for a specific period and is often defined by spending a certain number of days in a state. Domicile, on the other hand, is your permanent home—the place you intend to return to and remain indefinitely. You may be a resident of multiple states, but you can only have one domicile at a time. Understanding these distinctions is crucial for accurately filing state taxes and avoiding dual taxation.
What are the tax implications of freelancing or contracting across state lines?
As a freelancer or contractor working across state lines, you may owe income tax in every state where you earn income. This is common in industries like consulting or creative work. Each state has its own rules for what constitutes taxable income within its borders. Be sure to track where your work is performed and consult with a tax professional to properly allocate income and avoid penalties.
Do I need to pay taxes in both states if I move during the tax year?
Yes, you may need to file taxes in both your old and new states if you move during the tax year. You’ll typically need to file as a part-year resident in both states, reporting the income you earned while living there. Be sure to check each state’s rules, as some states may offer credits to offset taxes paid to the other state, minimizing double taxation.
How do I determine my tax home for federal tax purposes?
Your tax home is generally your main place of business, not necessarily where you live. For federal taxes, it’s used to determine deductible business travel expenses. If you work remotely, your tax home is usually your primary residence. However, if you frequently travel or work in multiple locations, consult a tax professional to clarify how to define your tax home.
Are there penalties for incorrectly filing state taxes when living and working in different states?
Yes, failing to properly file state taxes can result in penalties, interest charges, or even audits. Each state has its own rules for residency, income allocation, and filing requirements, so it’s essential to understand your obligations. Filing incorrectly can also delay refunds or trigger disputes between states over your tax liability. Using a tax professional or tax software can help ensure compliance.
Tax Help for Those Who Live and Work in Different States
Understanding state tax obligations when living in one state and working in another is crucial to avoiding double taxation and penalties. Residency rules, reciprocity agreements, and employer withholding policies all play a role in determining where taxes are owed. For those working remotely or traveling for work, state-specific rules may further complicate tax filings. Staying informed and seeking professional guidance can help ensure compliance and prevent unnecessary tax liabilities. Optima Tax Relief has over a decade of experience helping taxpayers get back on track with their tax debt.
If You Need Tax Help, Contact Us Today for a Free Consultation
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